For all those involved in the central and eastern European
syndicated loan market, Russia's political and economic bombshell
in 1998 was a rude reminder of the real risks involved.
All borrowers in the region felt the effects as lenders scaled back
their emerging market exposure and for a time central and eastern
Europe was virtually closed for business as far as syndicated
credits were concerned.
But eight months on and there are definite signs of recovery --
especially in the central European EU accession states of the Czech
Republic, Hungary, Poland and Slovenia.
Top tier banks and semi-sovereign entities from these countries
have this year cleared the market with new loan facilities, some
with notable ease. There is also a bulging pipeline of borrowers
who have recognised that lenders are gradually loosening their grip
on balance sheets. However outside these countries, borrowers are
finding it near impossible to win loan financing. Consequently,
most observers believe the market is being polarised into two
distinct sectors -- the EU accession states and their non-EU
accession counterparts. Toby Fildes reports.
The central and eastern European loan market is, at long last, making a much needed recovery after the nearly terminal blow delivered by Russia's devaluation and default debacle last summer. But it is emerging a very different animal than before Russia's implosion.
From the first quarter of 1996 until late August 1997, the region was patronised by an impressive and wide range of lenders, willing to meet the enormous borrowing appetite of not just the central European countries but also Russia, the central Asian states and the Baltic countries.
However, as 1999 develops and the shocks of the Russian default recede, it is becoming clear that attitudes have changed, that new risk averse lending criteria are in place and that traditional lending relationships are being more closely scrutinised than ever before.
As a result, the region is splitting into two distinct categories: the European Union accession states of central Europe, where structured and non-structured deals are getting done but at margins often double what they were a year ago; and the rest, where the only transactions are co-financings with multilaterals or securitisations of commodity receivables.
"There has been a dramatic polarisation of the central European, so called accession states, of the Czech Republic, Hungary, Poland and Slovenia away from the rest of the central and eastern European countries," says Christopher Scott, deputy general manager and head of loan syndication and placements at Sumitomo Bank in London.
"To some extent these four countries were pulling away from the pack before the Russian crisis, although whether or not the title of accession state was inspiring this move away is unclear.
"But Russia's default has accelerated this polarisation. Most
banks now are only focused on these four countries. Consequently
borrowers elsewhere, with
the possible exception of some in the Baltic states, are finding it almost impossible
to raise syndicated loans arranged by
Dresdner Bank is one bank that has taken this polarisation further than perhaps any other. The German bank no longer considers Czech Republic, Hungary, Poland and Slovenia to be part of the emerging markets but defines them as being on the 'mature market side'.
"This means we consider them to be much closer to western European risk than to eastern European risk, based on their economic fundamentals," says Peter Schott, assistant vice president and team head of syndicated loans at Dresdner Bank in Luxembourg. "The rest is eastern Europe and therefore somewhat down on our lending priorities."
He adds: "We made some thorough and exhaustive research into how dependent these four countries are on Russia and how different they are from Russia," he adds. "Our conclusion was that the Czech Republic, Hungary, Poland and Slovenia are more western European orientated than eastern Europe orientated. Consequently those four countries, as far as Dresdner is concerned, are seen as part of mature markets and not as emerging markets any more."
That nearly all of the region's deals that have come to market since the Russian crisis have been for borrowers in the four central European accession states bears out the two-tier approach being taken by bank lenders.
Indeed, the first two deals to break the ice after the Russian freeze and effectively reopen the central and eastern European loan market -- the DM280m five year term loan for Czech electric utility Ceske Energeticke Zavody (CEZ) and the $250m one year term loan for Polish telecom carrier Telekomunikacja Polska Akcyna (TPSA), both launched in October 1998 -- were for Polish and Czech borrowers.
The CEZ deal, as one the first deals to be launched since the Russian crash, was watched by almost the entire Euroloan market.
Many observers were waiting for the transaction to crash as they thought the tenor and the size were ambitious in such a volatile market climate. However, retail syndication was better than even the most optimistic of predictions and the deal was eventually increased to DM280m from DM250m.
According to the arrangers, one of the major forces behind the success of the deal was the margin of 50bp over Libor. CEZ's previous facility -- an Ecu100m seven year guarantee facility that was arranged in 1997 carried a margin of between 25bp and 30bp. Therefore CEZ was paying double.
"The pricing helped the deal through syndication," says Ulrich Mattonet, first vice president and head of loan syndications at arranger Bayerische Landesbank in Munich. "The margin reflected the conditions. But when we launched it there was anxiety about whether or not it would be enough, such was the volatility and the uncertainty."
But Mattonet was confident that the borrower was of sufficiently high quality to attract interest in syndication. "Deep down we knew that a name like CEZ would be able to clear the market, even under the poor conditions," he says.
"Indeed, from our pre-market soundings, we found out that a name
like CEZ was
do-able -- as long as the pricing was correct. Doubling last year's margin seemed the logical way forward. Also vital to the deal's success was the fact it was a Czech utility. It is possible that it would not have so successful if, say for example CEZ was Romanian or Bulgarian."
The Citibank and Dresdner Bank Luxembourg arranged $250m one year credit facility for TPSA also benefited from a good margin and from being in the right country.
Again the arrangers were by no means guaranteed a success, despite TPSA's solid reputation. However, the loan was modestly oversubscribed in general syndication. According to Bill Fish, managing director and head of loan syndications at Citibank in London, the margin played an important role in the success of the deal.
"The 50bp margin was double what TPSA paid in 1997 on a $250m facility," says Fish. "The market needed more yield to match the increased volatility and the resulting lack of appetite -- for at the time, many banks had suspended all eastern European lines of credit as a result of the Russian crisis. Also that the deal got done, and in considerable style, was testament to the quality of TPSA as a credit."
Another borrower to risk the market in the latter months of 1998 was Hungary's oil and gas company Magyar Olaj-es Gazipari (MOL). The borrower came in late November with a $100m five year revolving credit arranged by Bayerische Landesbank, Citibank, Deutsche and Sumitomo.
The arrangers had taken on board the elements that made the TPSA and CEZ deals successful: with a margin of 60bp, MOL was paying double what it did on its $500m 1997 revolving credit. Also, the fees had doubled, giving lead managers an all-in yield of 100bp compared to 67.5bp on the 1997 deal.
Because of the increased margin and fees, and also because of MOL's strong reputation, over $150m was raised in the club-style syndication. But lenders also say that MOL's credit is effectively that of Hungary itself.
"MOL is one of Hungary's biggest assets and is therefore of national importance," says a US banker. "To many banks it represents Hungarian sovereign risk. And because Hungary is in good shape, preparing to join the European Union and now part of Nato, it is one of the credits that international lenders will support."
The success of the CEZ, TPSA and MOL deals gave other central European borrowers the much needed confidence to come to market. Indeed, some of the region's top names have come to the market this year such as three of Poland's strongest banks -- Powszechny Bank Kredytowy, Bank Przemyslowo-Handlowy and Bank Handlowy w Warsawie,
Polish borrowers have, collectively, been the most frequent and successful visitors to the loan market since the Russian crash, often achieving the tightest spreads. "Poland has emerged out of the crisis as the strongest of the four states," says a London banker.
"The frequency of their borrowers to the market as well as the way in which they are supported by the international lending community shows this. Poland has the largest population and also has the biggest companies -- those with balance sheets strong enough to support syndicated loans."
However, the number of borrowers that have come since the Russian default and those that are believed to be close to launching deals is small, compared to the number before the Russian and Asian emerging market crises.
Because most lenders have, since the Russian default, made the decision not to lend to borrowers outside of the accession states, this drop in dealflow is not surprising.
But also contributing to the low deal count is the fact that, even within these four countries, a polarisation of credits has taken place.
Whereas one or two years ago, banks happily bid for loan mandates for second tier corporates and banks (for the right price), there has been a very obvious flight to quality with only the very top credits able to command lenders' attention.
"The gap between accession states' absolute top tier credits and their second tier borrowers has dramatically widened since the Russian default," says Glenn Davies, assistant director, central and eastern European marketing and origination at Bankgesellschaft Berlin.
"In 1997 banks went down the credit ladder to pick up some high yielding business. But now almost nobody entertains credits that are anything but the very best -- the best capitalised banks, the semi-sovereign utilities and the sovereigns themselves. As a result the very good borrowers command strong interest from lenders but there is very little left over for the second tier."
Some of the region's best known names have suffered as a result. Komercní banka, for instance -- one of the Czech Republic's most experienced private banks in the European syndicated loan market, has completed seven term loans and revolving credits since 1994.
One of its most recent deals was the DM250m five year revolving credit arranged in June 1997 by Barclays, Dresdner Bank Luxembourg, Sanwa Bank and Union Bank of Switzerland. The credit carried a margin of between 20bp and 22.5bp over Libor and paid a top commitment fee of 11.25bp and a co-arranging fee of 11.25bp -- fine terms even for strong western European financial credits.
However, since the Russian default, it has struggled to win the market's attention. According to most observers, the bank's Moody's credit rating of Baa2 and its financial strength rating of E+ no longer fit with their lending criteria.
"No one is prepared to fund Komercní Banka at the moment at the price it wants," says one banker. "The bank has been looking for a credit facility all year but banks have been unwilling to agree to its terms. Lenders want a minimum margin of 50bp before they even start to contemplate the credit. There was speculation that Komercní found this offensive."
Komercní's struggle is a very different story to that of Ceske Obchodni Banka. (CSOB). CSOB made it known to the market in February that it wanted to raise a $100m credit of between one and three years.
Although the bank is on the verge of being privatised (and has the same Moody's rating as Komercní), interest among potential lenders has been high and the mandate is expected by the middle of April.
"Much of the interest is because the bank is due to be privatised," said one regional expert. "But CSOB is one of the credits that international lenders are still prepared to support. There is a fine line between CSOB's and Komercní's credit quality, but it is thick enough to make the difference between getting a loan and not getting one."
CSOB's DM50m term loan, arranged by Bankgesellschaft Berlin, Bayerische Vereinsbank and Deutsche was one of the most successful central and eastern European deals of 1998. After initial market nerves -- it was the first Czech bank borrower to come to market in 1998 -- the deal proved to be a blow-out success. So successful, that after general syndication it was increased to DM120m.
According to the arrangers, the key to the success of the deal was the creditworthiness of the borrower. "CSOB is perhaps the best name in the Czech Republic and one of the best in the entire region," says an assistant director of investment banking at one London-based bank. "The market had toughened since 1997 but the right names in the right countries could still clear the market."
As for the countries not classified as accession states, the story is one of frustration and disappointment. Few deals have reached the market and most of those have had multilateral involvement or pre-export finance structures.
However, whether they are struggling purely as a result of not being accession states remains to be seen.
"The reason why these four countries are way ahead of the others is partly to do with the EU accession status, as the political risk is significantly reduced," says Simon Meldrum, a syndication manager specialising in central and eastern Europe at Bank of Tokyo-Mitsubishi in London.
"But they had to be well positioned in the first place to gain that status. You have to look at the wider angle. The Russian default prompted banks to look more closely at the actual country and transfer risk of credits. This closer, more detailed analysis resulted in Czech Republic, Hungarian, Polish and Slovenian borrowers emerging as the most attractive from this point of view."
Sumitomo's Scott agrees: "Obviously a country has to be some way up the ladder to qualify for EU accession status and the further a country is up this ladder, the better response it gets from the international markets. In this respect there must be some linkage.
"But the inability of Slovakian borrowers to tap the international syndicated loan market since the Russian default is not necessarily just because Slovakia is not an accession state. It is more likely to be a combination of factors, one of which is the poor political and economic state of the country. Another is the lower quality of credits."
Bankers point to Estonia, the fifth central and eastern European country that has been put on the fast track for EU membership, to illustrate their point. Estonia's EU accession status has not greatly helped its borrowers to tap the international syndicated loan markets since the Russian default.
Eesti Ühispank, rated Baa3 by Moody's, is the only Estonian borrower to come to market this year. However, despite Estonia being on the EU membership fast track programme, the deal carries a margin of 250bp over Euribor and has a one year maturity with two one year extension options. Arrangers are Hamburgische Landesbank and Landesbank Kiel.
Most observers have described the transaction as brave. "Estonia on the fast track has become a bit of an anomaly," says one banker. "Two or three years ago it was making good progress.
"But the Asian crisis reduced lenders' appetite and then the Russian crisis showed just how dependant Estonia is on its giant neighbour. Estonia's example shows how important western Europe's links are with the Czech Republic, Hungary, Poland and Slovenia." EW